Leigh Crestohl, Audley Sheppard

Clifford Chance LLP

2007 marked the 10th anniversary of the coming into force of the Arbitration Act 1996, on 31 January 1997. In a number of decisions this year, English courts reinforced their arbitration-friendly credentials.
As at 16 November 2007, a search on LAWTEL using the key word ‘arbitration’ produced a list of 65 decisions.³ This compares with 62 decisions over the same period in 2006 (and 70 for the whole year) and 74 decisions over the same period in 2005 (and 81 for the whole year). Of the 65 decisions in 2007, 46 appear substantively to deal with arbitration issues, of which nine are of the Court of Appeal and two of the House of Lords Judicial Committee. Space does not permit a review of all the interesting cases that have contributed to English arbitral jurisprudence during the year, but we summarise several significant decisions below.

Separability of arbitration clause

The decision of 2007 most eagerly awaited and likely to be cited regularly in the years to come was that of the House of Lords in Fiona Trust & Holding Corp v Yuri Privalov.⁴
A dispute arose under a series of charterparties between the shipowners and eight charterers. The shipowners alleged that an associate of the charterers had induced the contracts by bribery. The ship owners applied to the English court for a declaration that they had validly rescinded the charterparties. The charterers applied for a stay of the litigation in favour of arbitration, pursuant to section 9 of the Arbitration Act 1996. The stay was refused at first instance, but was granted by the Court of Appeal. On appeal to the House of Lords, the two principal issues were:
• whether the arbitration clause, as a matter of construction, covered a dispute over whether the contract was procured by bribery; and
• whether a party was bound to submit to arbitration when it alleged that, but for the bribery, it would never have had entered the contract containing the arbitration clause.

Lord Hoffmann gave the leading speech. In his introductory remarks, he noted that questions of construction must be influenced by the purpose of the arbitration clause, which is to have disputes decided by a tribunal that the parties have chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. He added that, particularly in the case of an international contract, the parties want a quick and efficient adjudication and do not want to take the risks of delay and, in too many cases, partiality, in proceedings before a national jurisdiction. He went on to say:
If one accepts that this is the purpose of an arbitration clause, its construction must be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts....⁵

The first question in the appeal concerned the scope of the arbitration agreement. Some authorities had drawn a distinction between clauses that used the words ‘arising under’ (which had been held to cover contractual, but not tortious and other claims) and those that used the words ‘arising out of’ (which had been held to be wide enough to include non-contractual claims). This was sometimes called the ‘battle of the prepositions’. Applying a purposive approach, Lord Hoffmann concluded that businessmen would be very unlikely to have intended different consequences by such subtle semantic differences and he approved the approach of Longmore LJ in the Court of Appeal, who said: “the time has come to draw a line under the authorities to date and make a fresh start”.⁶ Lord Hoffmann concluded that there was nothing in the arbitration agreement to suggest that the parties intended that a dispute as to the invalidity of the charterparties on the basis of bribery was to be submitted to a national court rather than to arbitration.
As regards to the second issue, whether fraud tainted and rendered the whole agreement void and unenforceable, the House of Lords endorsed the doctrine of the separability of the arbitration agreement enshrined in section 7 of the Act and held that the arbitration agreement was ineffective only if the owners could produce credible evidence that showed that bribery had specifically induced the parties to agree to arbitration.
It is hoped that the Fiona Trust decision will be followed in other common law jurisdictions, where allegations of fraud can be used to try to derail arbitration and move the dispute to the local courts.

Anti-suit injunctions

The West Tankers case⁷ placed squarely before the House of Lords the issue of the compatibility of anti-suit injunctions with the provisions of the EC Council Regulation of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Judgments Regulation).⁸ Whether the English court is entitled to issue an anti-suit injunction against a party that has started court proceedings in another EU jurisdiction is an issue that has elicited considerable debate on both sides of the common law–civil law divide. The issue was the subject of a well-attended seminar organised by the British Institute of International and Comparative Law as part of its seminar series on private international law.
The House of Lords decided to refer the issue to the European Court of Justice for a preliminary ruling. The following question is now pending before the ECJ:
Is it consistent with [the Judgments Regulation] for a court of a Member State to make an order to restrain a person from commencing or continuing proceedings in another Member State on the ground that such proceedings are in breach of an arbitration agreement?⁹

Nevertheless, the Law Lords, and in particular Lord Hoffmann, left little doubt as to how they thought the question should be answered. In his opinion, arbitration was outside of the operation of the Judgments Regulation, not only by its express terms (article 1(2)(d)), but also because the principles on which it is based are wholly unsuited to arbitration, “in which the status and governing law are generally chosen by the parties on grounds of neutrality, availability of legal services and the unobtrusive effectiveness of the supervising jurisdiction.”¹⁰ Anti-suit injunctions prevent parties from seeking to defeat this commercial expectation by starting court proceeding in breach of an agreement to arbitrate.
Lord Hoffman noted that the European Community is engaged not only with regulating commerce between member states but also in competing with the rest of the world. If the member states of the European Community are unable to offer a seat of arbitration capable of making orders restraining parties from acting in breach of the arbitration agreement, there is no shortage of other states that will (such as New York, Bermuda and Singapore).

Arbitration and human rights

Article 6 of the European Convention on Human Rights (which has been incorporated into English law) provides that:
in the determination of his civil rights and obligations… everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.

In two cases heard together, the Court of Appeal confirmed that arbitration is not contrary to article 6, unless the agreement to arbitrate was entered into as a result of duress, undue influence or mistake, or included onerous or unusual terms that should have been, but were not, brought to the attention of the other party.
In Stretford v Football Association,¹¹ Paul Stretford was a football agent. All football agents are required to hold a licence. The licence expressly stated that the holder agreed to abide by the FA’s rules and regulations, which included an arbitration clause in rule K. In 2005, the FA issued disciplinary proceedings against Stretford under rule G in relation to the circumstances surrounding the acquisition of the right to represent Manchester United footballer Wayne Rooney. Stretford commenced court proceedings against the FA, alleging that the disciplinary proceedings were unjustified. The FA applied for a mandatory stay in favour of arbitration under rule K for the determination of Stretford’s challenge to the rule G proceedings. Stretford argued that rule K was in conflict with article 6 and the principles of natural justice, and was therefore null and void or inoperative.
It was not in dispute that the arbitrators would be determining Stretford’s civil rights; therefore, article 6 applied. As to whether he would receive a fair hearing before an independent and impartial tribunal, the court considered that this entitlement was satisfied by the provisions of the Arbitration Act 1996, which require that an arbitrator be impartial and conduct the proceedings properly, and by the mandatory provisions ensuring that the court has the power to correct any want of impartiality or procedural impropriety.
As to having a public hearing by a tribunal established by law, the court concluded that, as a matter of English law, these requirements could be waived (unless the party had entered into the arbitration agreement as a result of duress, undue influence or mistake, or the terms were so onerous or unusual that they should have been brought to the party’s attention, but were not). The court concluded that there was no evidence of the arbitration agreement being entered into under duress or of it containing onerous terms, and that the additional requirements in article 6 had been waived by Stretford.
The court then considered whether there was any principle adopted by the European Court of Human Rights that would lead to a different conclusion. After reviewing the ECHR’s jurisprudence, the court held that the cases supported the general proposition that, where the parties have voluntarily entered into an arbitration agreement, they are to be treated as having waived their rights under article 6. Although Stretford had to agree to rule K in order to become a licensed agent, it did not follow that the arbitration agreement was compulsory in such a way as to contravene article 6.
The court noted that arbitration clauses have become standard in the rules of sporting organisations and that to strike down such clauses would have a far-reaching and undesirable effect on the use of arbitration in sport generally. Therefore, Stretford’s application failed and a stay was granted.
In Sumukan Ltd v Commonwealth Secretariat,¹² AMS (the predecessor in title to Sumukan) applied to appeal an arbitral award made against it on a point of law under section 69 of the Act, but leave to appeal was denied on the ground that the parties, in the words of section 69(1), had “otherwise agreed” to exclude the jurisdiction of the court in their arbitration agreement. AMS appealed that decision, arguing that the clause excluding an appeal on a point of law had not been incorporated into the arbitration agreement, and that such a clause would infringe AMS’s rights under article 6.
Regarding the issue of incorporation, the contract provided for disputes to be settled by arbitration “in accordance with the statute which forms part of this contract and is available on request”. The statute stated that the judgment of the tribunal “shall be final and binding on the parties and shall not be subject to appeal”. The court concluded that this wording was sufficient to incorporate the words of the statue into the arbitration agreement.
However, as the statute amounted to an exclusion clause (ie, a clause excluding the jurisdiction of the court), a party seeking to enforce such a clause would have to show that any particularly onerous or unusual conditions, or conditions attempting to exclude or take away statutory rights, were fairly brought to the attention of the other party. AMS argued that the waiver of its article 6 rights had not been drawn to its attention sufficiently and that the waiver had not been made voluntarily.
The court referred to its decision in Stretford and its findings derived from the ECHR’s jurisprudence that an arbitration agreement, when freely entered into, constitutes a valid waiver of article 6. The court concluded that an exclusion of a right of appeal could validly be agreed as being to the advantage of both parties, and that mandatory provisions in the Act safeguard a party against partiality of the arbitrators or some serious irregularity.
It was not alleged that AMS had entered into the agreement under duress. The court found that the exclusion of the right of appeal was validly incorporated and that article 6 did not render the clause so onerous or unusual that the Commonwealth Secretariat was required to do more than it had done to bring the clause to AMS’s attention, as the arbitration clause referred expressly to the statute and, if AMS had wished to read what was in the statute, it could have done so and would not have been surprised to find an exclusion of the right to appeal an award.
The statements of principle made by the Court of Appeal in these two cases reflect the ECHR’s jurisprudence that has held that private arbitration is not inconsistent with article 6, such as Deweer v Belgium.¹³ Indeed, as Lord Hoffmann observed in the Fiona Trust case, “the European Convention was not intended to destroy arbitration. Arbitration is based upon agreement and the parties can by agreement waive the right to a court.”¹⁴
While a waiver of article 6 rights must be voluntary, these two Court of Appeal decisions indicate that the English courts will not readily decline to give effect to arbitration provisions found within an agreement that is freely entered into by competent parties.

Review of BIT award

The English courts have rarely been required to address issues relating to bilateral investment treaty (BIT) arbitrations. In Ecuador v Occidental,¹⁵ the court was asked whether an arbitral tribunalconstituted pursuant to the BIT between the US and Ecuador had jurisdiction to determine claims relating to the refunding of value added tax (VAT) payments, or whether jurisdiction was excluded by the express terms of the treaty.
At issue in the arbitration was whether the Occidental Exploration & Production Company was entitled to obtain refunds of VAT payments. Occidental had a contract with Ecuador and Petroecuador, the state-owned petroleum company, which gave it exclusive rights to carry out exploration and exploitation of hydrocarbons in an area in the Amazon Basin. Occidental was required to pay VAT on certain goods and services, which it paid, but later obtained refunds. Subsequently, the Ecuadorian authorities changed their position and contended that reimbursement had already been effected through a price formula in the contract, referred to as ‘factor X’. Therefore, Ecuador argued, Occidental was not entitled to additional refunds of VAT.
The dispute was originally raised with Ecuador’s Internal Revenue Service but when it could not be resolved Occidental invoked the United Nations Commission on International Trade Law (UNCITRAL) Model Law arbitration procedures of the BIT. It claimed that the actions of the Inland Revenue Service, for which Ecuador was responsible, amounted to a breach of the BIT.
The place of arbitration was London. The arbitral tribunal concluded that refusing to refund the VAT had amounted to a violation of the BIT and awarded Occidental over $71 million plus interest.
In the arbitration, Ecuador contended that tax disputes were not within the scope of the BIT, which provided that the provisions of the treaty applied to matters of taxation only with respect to the “observation and enforcement of terms of an investment agreement or authorization”.
Although Ecuador accepted that the contract at issue was an investment agreement, it argued that the dispute did not concern the observance and enforcement of terms of such an agreement. The arbitral tribunal disagreed and held that it had jurisdiction. Ecuador challenged the tribunal’s award on the basis of lack of substantive jurisdiction pursuant to section 67 of the Arbitration Act 1996. The High Court decided in favour of Occidental. Ecuador appealed.
The Court of Appeal confirmed that the BIT is governed by public international law and, as a treaty, its construction is governed by the rules on treaty interpretation set out in the Vienna Convention on the Law of Treaties 1969. Thus, for example, a letter submitting the BIT to the US Senate was relevant to its interpretation. Furthermore, it is permissible to resolve uncertainties in the interpretation of such a treaty in favour of the investor.
The Court of Appeal agreed with the High Court that “observation and enforcement of terms” encompassed performance and that the dispute involved a matter of taxation which had reference to the performance of the obligations of the contract. Occidental’s request for a refund related to the proper determination of factor X and also to its wider contractual obligations, including the obligation to do all that was needed to exploit the block, which would necessarily entail payment of VAT and the contractual obligation to pay all taxes according to Ecuadorian law.
In disposing of Ecuador’s jurisdictional challenge, the Court of Appeal was required to interpret a BIT between the US and Ecuador. This is somewhat unusual in that disputes relating to the sovereign conduct of a friendly foreign state are largely non-justiciable under English law. The court had previously held in the same case that issues relating to a BIT award made in England where the UK is not a party to the treaty are nevertheless justiciable before the English courts.¹⁶
This decision shows that the English courts do not interpret BIT jurisdiction narrowly.

Security for costs when enforcing award

In Gater Assets Ltd,¹⁷ the Court of Appeal was confronted with difficult questions of substance and procedure concerning applications for security for costs in proceedings to enforce New York Convention arbitration awards.
Gater Assets was the assignee of a foreign arbitration award against Naftogaz. Enforcement was resisted by Naftogaz on grounds that the award had been obtained by fraud (in connection with subrogation by the claimant’s insurer). Naftogaz applied for an order that Gater Assets provide security for its costs.
In the High Court, Gater Assets was ordered to furnish security in the amount of £250,000. The Court of Appeal reversed this decision. However, each of the three judges pursued a different analysis, thus creating some ambiguity for the future.
After a lengthy analysis of the Arbitration Act 1996, the Rules of Civil Procedure and the interplay of the rules relating to domestic and foreign arbitral awards, and the terms of article III of the New York Convention, Rix LJ found the provisions to be “complex and not without their mystery for present purposes”. He was prepared to assume, without deciding, that the Court had jurisdiction to make an order for security for costs. Of concern to the judge was his feeling that it was counter-intuitive to order security for costs against an award creditor, in enforcement proceedings that were intended to be “highly summary and essentially quasi-administrative proceedings”.¹⁸ He concluded that the requirement to furnish security would amount to a “more onerous condition” contrary to the express terms of article III of the New York Convention. Moses LJ, on the other hand, was of the opinion that the effect of article III was that the court did not have jurisdiction to require an award creditor to furnish security.¹⁹ For his part, Buxton LJ would have denied the appeal and upheld the order that security be provided. He found that the New York Convention recognised that enforcement had to be in accordance with national rules of procedure, which in the case of England provided for security for costs in appropriate circumstances.²⁰
One of the goals of the drafters of the Arbitration Act was to make English arbitration law more accessible and understandable to the lay arbitrator or foreign lawyer. The goal remains to be achieved in respect of some aspects of English arbitration law.

Other developments in 2007

2007 also saw the publication of the fourth edition of The Arbitration Act 1996 by Bruce Harris, Rowan Planterose and Jonathan Tecks, and a 23rd edition of Russell on Arbitration will be published shortly.
The LCIA has had an active year. As of 16 November 2007, it had received 105 requests for arbitration during the year. 2007 also saw the opening of the LCIA’s first overseas establishment, in the Bahamas. Likewise, the Chartered Institute of Arbitrators had a busy year, the highlight of which was the publication of its Practice Guideline 16: The Interviewing of Prospective Arbitrators.

* * *

The decisions summarised above, and in particular the speeches in the House of Lords in Fiona Trust and West Tankers, all evidence the English courts’ strong support for arbitration and demonstrate the determination of the courts to be practical and business-minded in their approach, which augurs well for the next 10 years of the Arbitration Act.

Notes

1 Partner, Clifford Chance LLP; co-chair of the IBA Arbitration Committee (2006-07); visiting professor, School of Arbitration, Queen Mary, University of London.
2 Senior associate, Clifford Chance LLP.
3 LAWTEL database from Sweet & Maxwell, available at www.lawtel.com.
4 Fiona Trust & Holding Corp & 20 others v Yuri Privalov & 17 others, sub nom Premium Nafta Products Ltd & ors v Fili Shipping Co Ltd & Ors [2007] UKHL 40, affirming [2007] EWCA Civ 20.
5 Ibid, at paragraphs 6-7.
6 Cited by Lord Hoffmann, at paragraph 12.
7 West Tankers Inc v RAS Riunione Adriatica di Sicurta SpA and others [2007] UKHL 4, [2007] 1 Lloyd’s Rep 391.
8 EC Regulation 44/2001, O J L 12, p1.
9 Case C-185/187, OJ C 155/9, 7 July 2007.
10 Per Lord Hoffmann, at paragraph 12.
11 Paul Stretford v Football Association Ltd [2007] 2 Lloyd’s Rep 31 (CA)
12 Sumukan Ltd v Commonwealth Secretariat [2007] All ER 342.
13 [1980] 2 EHRR 439.
14 [2007] UKHL 40, at paragraph 20.
15 The Republic of Ecuador v Occidental Exploration & Production Company [2007] EWCA Civ 656.
16 [2005] EWCA Civ 1116.
17 Gater Assets Ltd v NAK Naftogaz Ukrainiy [2007] EWCA Civ 988.
18 Ibid, per Rix LJ, at paragraph 72.
19 Ibid, per Moses LJ, at paragraphs 92-93.
20 Ibid, per Buxton LJ, at paragraph 116.